2 Payment Processing Kings to Consider Today
Bill is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
eBay (NASDAQ: EBAY) released solid quarterly results in both its Paypal.com payments business and in its marketplace business. Given this good news and the stock’s attractive relative valuations versus other payment companies and online merchants, investors should consider watching eBay for a more appealing entry point.
eBay revealed that for the quarter ended in Sept. 30 it has earned $597 million on $3.4 billion in revenue at the rate of $0.45 per share, just below analyst estimates of $3.41 billion in revenue. Both the top line and bottom line were significantly higher than the same time of the previous year, which saw $491 million on $3 billion revenue. If you exclude one-time items, then the earning would be $718 billion at the rate of $0.55 per share. Kerry Rice, an analyst of eBay for Needham said, “Margins are a little better than expected and investments aren’t hurting the bottom line.”
Sales from eBay’s primary marketplace as well as revenue from PayPal online payment business are both are on the rise compared to last year, increasing by 9% and 23%, respectively. eBay has taken some steps to organize its online shopping and it has already redesigned its site by personalizing each customer's experience. Moreover, CEO John Donohoe anticipates more than $10 billion mobile payment sales this year via PayPal. Revised guidance from eBay forecasts fourth-quarter revenue between of $3.85 billion and $4 billion, while analysts forecasted $3.94 billion revenue for eBay in the fourth-quarter.
Valuing the Competition
Amazon’s (NASDAQ: AMZN) shares are trading at an indefensibly high 292.68 price-to-earnings ratio and a price of nearly $240 per share. Amazon’s high valuations are based on some of the firm’s highest recorded earnings: this is not an anomalously high P/E multiple based on temporarily-depressed earnings. That said, high earnings are simply not enough to justify even higher valuations. The 14.46 price-to-book multiple of this stock is higher than the 2.07 S&P 500 price-to-book ratio. The firm's price-to-sales ratio of 2 is in line with today's prevailing market multiples.
Both eBay and Amazon compete for business from third-party suppliers in their marketplaces, yet their price multiples could not be more different. At $50 per share price levels, shares of eBay are provide growth at a reasonable price. eBay shares currently trade at a high 17.53 price-to-earnings ratio, a higher value than the S&P 500 index, but a value that is much lower than the nearly 300 price-to-earnings ratio of Amazon.com. Since commerce on eBay’s platform finance their own inventory and operating costs, it enjoys higher margins and its much higher 4.95 a price-to-sales ratio can be justified.
Overstock.com (NASDAQ: OSTK) is another competitor of eBay and Amazon.com that specializes in inventory closeouts. Overstock.com shares afford speculators an attractively-priced betting opportunity to speculate on, at about $11 a share. When compared to the 1.32 price-to-sales ratio of the S&P 500, the 0.25 ratio of this stock is very attractive. Overstock.com can be seen as risky, since it ran a net loss for the last twelve months.
Payment industry firms offer a basis of comparison for eBay’s Paypal business. Payments giant Visa (NYSE: V) stock is too expensive, at a price of roughly $140, a price level which seems impossible to justify. Equity in this this company is rich on a price-to-sales basis, since shares trade at a 11.27 multiple, over eight time higher than the 1.32 the S&P 500 average. Visa shares are trading at an very high 138.58 price-to-earnings ratio. The 4.33 price-to-book multiple of this stock is higher than the 2.07 S&P 500 price-to-book ratio.
Price multiples for Mastercard (NYSE: MA) are less extreme, but still high. Mastercard stock trades around $470 per share. Equity in this this company is rich based on a 8.23 price-to-sales ratio, a 28.1 price-to-earnings ratio, and a 9.37 price-to-book ratio.
In summary, it is clear that eBay is cheap relative to its competitors on a price-to-earnings basis:
Amazon and Overstock.com bulls may focus on a lower P/S multiples. However, an overview of firm margins reveals that eBay is their better:
eBay’s margins blow away these two websites. Its transaction and fee-based income makes its margins closer to those of MasterCard and Visa.
At this point, investors should wonder if eBay’s growth prospects are much lower than its competitors. This would be the only way to explain why it trades at a significantly lower price-to-earnings multiple. This does not appear to be the case:
MasterCard and Visa are the only firms that are wildly better than eBay in terms of its historical earnings growth. In terms of analyst forecasts, Amazon is more than double eBay, but that's the only company that's predicted to do better.
eBay is an attractive alternative to Amazon, Overstock, and Visa as a company that fuses payment and marketplace operations. MasterCard may also be attractive as a growth stock in the payments industry. Investors should consider buying either firm on price declines.
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BillEdson11 has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com and MasterCard. Motley Fool newsletter services recommend Amazon.com, eBay, Overstock.com, and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.